Investor Field Notes: Distribution and Conversion Models for Consumer Startups

Investor Field Notes: Distribution and Conversion Models for Consumer Startups

Introduction

The success or failure of internet businesses is determined by two key metrics: distribution and conversion. Distribution refers to how businesses acquire new customers, while conversion measures a business's ability to optimize user experience and achieve specific goals. In the consumer ecosystem, new waves of distribution channels open every few years, but eventually become crowded and less attractive for new entrants. However, distribution alone is not enough; conversion is the never-ending process of deepening and optimizing engagement. In this article, we will explore various distribution and conversion models for consumer startups.

Distribution: Virality via Social Proof

One effective way to drive distribution is through social proof, which is a well-observed consumer behavior where people mirror the actions of others to reflect correct behavior. People trust in groups and friends and want to emulate behavior that is validated by others. By leveraging social proof, businesses can create viral loops that attract new users. Startups should focus on building products and experiences that encourage users to share their positive experiences with their networks, thus expanding their reach through social proof.

Distribution: The Etsy Effect

Driving discovery is one of the biggest challenges in building an audience of engaged consumers. Consumers are often tempted to engage only with the original seller that referred them. However, if users understand that they can be discovered on a platform, it drives loyalty to the platform and creates brand equity. Startups should focus on building platforms that enable users to discover new products and sellers, thereby fostering a sense of community and loyalty.

Distribution: Influencers Enable Disintermediation

Influencers serve as a highly fragmented distribution channel with more opportunities for exploitation. While scaling influencer marketing is not trivial, the upside of low-cost customer acquisition is usually worth the effort. Startups can tap into the audiences of influencers to reach new customers and build brand awareness. By partnering with influencers, startups can leverage their celebrity influence and social proof to rapidly grow their customer base.

Distribution: New Platforms

New platforms offer new opportunities for startups. These platforms can be either mega platform shifts or breakout individual platforms that aggregate consumer eyeballs and become new distribution channels. In the past decade, we have been in the Internet broadband paradigm without any major platform shifts. However, we may be on the cusp of experiencing another mega shift, which could include IoT or voice devices, autonomous or connected vehicles, and blockchain technology. Startups should keep an eye on emerging platforms and exploit their features for distribution.

Distribution Tactics: Group Purchasing

Group Purchasing Organizations (GPOs) allow organizations to pool their purchasing volume to negotiate discounts. Users are incentivized to share deals with their networks to secure discounts, while merchants benefit from streamlined supply chains and aggregated deliveries. Startups can leverage the power of group purchasing to attract new customers and create a sense of community around their products or services.

Distribution Tactics: Niche Markets

By building for niche, underserved communities, startups can create world-class experiences that "wow" a specific vertical. This approach spurs liquidity and organic growth through word-of-mouth recommendations. Investors believe that most Reddit communities with tens of thousands of members have the potential to be turned into discrete products. Startups should focus on building for niche markets to capture the attention and loyalty of a specific target audience.

Distribution Tactics: Standing on the Shoulder of Giants

Startups can find opportunities to exploit large incumbent platforms for cheaper distribution. This strategy works best when there is a privileged relationship with the giant platform. However, there is a risk of platform dependency. As long as the company can grow quickly enough and generate cash flows, platform dependency becomes irrelevant. Startups should capitalize on the resources provided by large platforms while building their own customer acquisition engines.

Distribution Tactics: First Order Irrational, Second Order Rational

Some startups can disrupt markets by taking seemingly irrational actions that have second-order results benefiting the company. This strategy requires being one of the first to take advantage of the "irrational" move and capitalizing on its benefits. By thinking outside the box and embracing unconventional strategies, startups can create exceptional business models that set them apart from competitors.

Distribution Tactics: FOMO and the Velvet Rope

FOMO (Fear Of Missing Out) is a powerful social motivator, especially in a world where it is easy to observe the behavior of one's social network on social media. Companies successfully leverage FOMO by limiting early usage, creating a sense of exclusivity. The invite system, for example, implicitly leverages social proof, showing potential users that their friends are already using the product. Startups should consider using FOMO to drive conversion and create a sense of urgency among users.

Conversion Tactics: A/B Testing

A/B testing is a powerful tool for optimizing conversion rates. By testing different variations of a product or website, startups can gather data on user preferences and behavior. This data-driven approach allows startups to make informed decisions and continuously improve the user experience to achieve higher conversion rates.

Conversion Tactics: Auctions

Auctions tap into the human desire to compete for scarce goods and resources. By creating a highly engaging experience, startups can combine competition with the incentive for users to observe the behavior of others and make buy/not buy decisions. Auctions drive conversion by creating a sense of urgency and excitement among users.

Conversion Tactics: Entertainment as Conversion

Livestream experiences that incorporate elements of gamification or surprise can significantly impact conversion rates. By providing users with an entertaining and immersive experience, startups can enhance engagement and increase the likelihood of conversion. Gamification strategies, such as points and badges, leaderboards, avatars, and teammates, can be implemented to create a sense of fun and excitement.

Conversion Tactics: Community-Driven Conversion

Creating a sense of community among users can greatly impact conversion rates. When users share a live, synchronous experience that they can then share with others, their motivation to start and stay highly engaged increases. Startups can leverage community-driven conversion by grouping users into small cohorts that work through course materials together, sharing updates, feedback, and support. This sense of camaraderie encourages users to remain engaged and convert into loyal customers.

Conversion Tactics: Gambling Psychology

Leveraging the concept of gambling can be a powerful conversion strategy. Many consumer social feeds use the concept of gambling by providing users with a whole new set of content upon refresh, similar to spinning again on a slot machine. This constant stream of new content keeps users engaged and encourages them to continue using the platform.

Conversion Tactics: Scarcity

Scarcity is a subset of FOMO and is a well-worn conversion strategy. By creating a sense of limited availability or exclusivity, startups can drive conversion rates. Limited-time offers, flash sales, and exclusive access can all tap into the human desire to acquire something rare or unique. Startups should leverage the power of scarcity to create a sense of urgency and drive conversion.

Conclusion

Distribution and conversion are the driving forces behind the success or failure of consumer startups. While distribution channels may evolve and become crowded over time, startups can explore various tactics and strategies to acquire new customers. By leveraging social proof, tapping into niche markets, and exploiting emerging platforms, startups can find new opportunities for growth. Additionally, conversion strategies such as A/B testing, auctions, and community-driven experiences can optimize user engagement and increase conversion rates. In the ever-changing landscape of consumer startups, it is crucial for founders to constantly experiment and adapt their distribution and conversion models to stay ahead of the competition.

Three Actionable Advice:

• 1. Prioritize conversion over monetization: Instead of obsessing over monetization, focus on optimizing conversion rates. By deepening and optimizing user engagement, monetization will naturally follow.

• 2. Embrace unconventional strategies: Don't be afraid to take seemingly irrational actions that have second-order benefits. By thinking outside the box and being one of the first to capitalize on new opportunities, startups can disrupt markets and create exceptional business models.

• 3. Leverage the power of social proof: Encourage users to share their positive experiences with others, leveraging the concept of social proof. By creating viral loops and tapping into the trust people have in groups and friends, startups can acquire new customers and build brand equity.

In conclusion, the distribution and conversion models for consumer startups are crucial for their success. By understanding the power of social proof, embracing unconventional strategies, and optimizing conversion rates, startups can navigate the ever-changing landscape and achieve sustainable growth. With the right tactics and a constant willingness to experiment, startups can thrive in the competitive world of consumer startups.